The Failure of FCC Spectrum Auctions Gregory F. Rose Mark Lloyd The Failure of FCC Spectrum Auctions Gregory F. Rose Mark Lloyd May, 2006 The Failure of FCC Spectrum Auctions Gregory F. Rose and Mark Lloyd Executive Summary The Federal Communications Commission’s auctioning of spectrum licenses is a failure. The auctions have been subject to collusion and manipulation by big business, and as a result have failed to meet legislative guidelines. Until the FCC can demonstrate that it can conduct auctions in the public interest, Congress should halt the ongoing plans to auction licenses to the public spectrum. In 1993 Congress gave the Commission authority to use competitive bidding to choose from among two or more mutually exclusive applications for an initial license. Prior to this the Commission mainly relied upon comparative hearings and lotteries to select a licensee from a pool of mutually exclusive applicants for a license. In the Balanced Budget Act of 1997, Congress extended and expanded the FCC’s auction authority. Congress set multiple goals for spectrum auctions, as the Congressional Budget Office pointed out: In designing auctions for spectrum licenses, the FCC is required by law to meet multiple goals and not focus simply on maximizing receipts. Those goals include ensuring efficient use of the spectrum, promoting economic opportunity and competition, avoiding excessive concentration of licenses, preventing the unjust enrichment of any party, and fostering the rapid deployment of new services, as well as recovering for the public a portion of the value of the spectrum.1 According to a rigorous economic analysis of the last ten years of FCC auctions by Dr. Gregory Rose, an expert in game theory, the FCC has failed to meet many of the congressional goals. Efficiency and Maximizing Receipts Despite legislative direction not to focus on maximizing receipts, proponents of FCC spectrum auctions suggest the competitive bidding structure is justified because it is both economically efficient and revenue maximizing. Detailed analysis of the 58 auctions thus far completed shows that the claim regarding maximizing receipts is false and the claim of efficiency is at best an illusion. The Commercial Spectrum Enhancement Act requires the Government Accountability Office (GAO) to examine the FCC’s commercial spectrum licensing process.2 In addressing this requirement GAO conducted a literature review, organized limited “stakeholder” panels, and generally glossed over areas of disagreement.3 The GAO relies on and repeats the FCC assertion that the auction of licenses for spectrum use is successful for two main reasons: 1) auctions are more efficient than either comparative hearings or lotteries, and 2) auctions raise revenue. The Failure of FCC Spectrum Auctions 1 By efficient the FCC and the GAO seem to mean that auctions take into account market price where lotteries and comparative hearings do not, and that they are less of an administrative burden.4 As Rose demonstrates, however, the FCC spectrum auctions are fraught with price distortions both as a result of FCC mispricing and tacit manipulation in the bidding process. The notion that an administrative process that is clearly flawed is justified because it is speedy cannot be supported. The second rationale advanced by GAO and the FCC that the competitive bidding process contributes additional dollars into the U.S. Treasury is true, but that does not mean that the additional dollars are commensurate with the value of the spectrum. In a highly influential 1995 column, former Nixon aide and New York Times columnist William Safire expressed alarm over the federal budget deficit, and the solution he saw to this looming crisis was spectrum auctions. Based only on current uses, which are primitive, the market value of the VHF, UHF, cellular, broadband and narrowband spectrum ranges around $120 billion. But in the near future, your television set will combine with your computers and telephone and fax machine into a single unit you can hang on the wall or fold up in your pocket. That’s soon – possibly in the next Presidential term. I’ve seen not-for-attribution estimates that the market value of the digitized spectrum in that onrushing era will be – hold your breath – a half-trillion dollars, give or take a hundred billion.5 While the federal budget projected a surplus at the end of the Clinton Administration, the budget deficit has ballooned again. Assuming Safire wrote this with some basis, FCC spectrum auctions have not come close to the half-a-trillion dollars desperately needed now to close the budget deficit again. Revenue from spectrum auctions so far is in the $45 billion range and the Congressional Budget Office and the Bush White House guesstimate that after a slight dip in 2008 auctions will raise perhaps another $6-10 billion through 2015. At a time when the revenue is badly needed, we have not come close to receiving a fair market value for the spectrum licenses auctioned thus far. According to Rose, there is evidence that considerably less revenue has been raised than might otherwise have been the case. Large-scale mispricing by the FCC has resulted in failure to raise expected revenue or allocate licenses in over 36 percent of auctions. Further reduction of potential revenue results from the ability of bidders to adopt manipulative strategies of tacit collusion or preemptive bidding. Both of these strategies result in the auctioning of licenses at significantly lower prices to the manipulating bidders than to those who do not employ these strategies. Collusion does not generally result in a fair auction where the winning bids are commensurate with the value of auctioned item. Furthermore, significant amounts of revenue have been generated by a handful of auctions, an artifact both of genuinely different valuations for different bandwidths and of the way in which FCC rules determine qualifying bidders. 2 Center for American Progress Imagine Christie’s selling a million-dollar Picasso to a wealthy collector for one hundred dollars but claiming success because it was an easy and quick sale and the money is in the bank. As Dr. Rose notes, if a private auction house did as poor a job as the FCC in returning value to the sellers, that auction house would be out of business. A Chance for Entrepreneurs? The legislator perhaps most responsible for pushing through the 1996 Telecommunications Act was former Senator Larry Pressler. Pressler argued: “We have a responsibility to stand up to special interests and to auction off those portions of the spectrum that will provide new uses and will provide billions of dollars for the taxpayers of this country.” 6 While we cannot be absolutely certain who Senator Pressler was referring to by the term “special interests,” a substantial portion of the public record suggests that many members of Congress were very concerned to avoid the concentration of licenses and to provide opportunities to small entrepreneurs. # of Auctions in Which There Is a Statistically Significant Difference in the Average Number of Licenses Assigned to the Top Five Bidders and the Bottom Five Bidders * There are thirty-five auctions in which the difference is significant at alpha < .001, one auction in which the difference is significant at alpha < .01, and one auction in which the difference is signifi- cant at alpha < .05. In 19 auctions there was too small a sample. Even the rosy GAO report notes that “some industry stakeholders we interviewed stated that auctions limit participation to large companies,” yet GAO has not conducted an analysis of this issue. Dr. Rose’s careful analysis of the auctions reveals a significant skew of auction outcomes have favored a small subset of bidders – and those bidders are not small entrepreneurs. There is a tendency for some bidders to prevail in multiple auctions, and there has been a measurable increase in the market power of large media corporations. Furthermore, the FCC procedure of simultaneous, multi-stage auctions over multiple items is subject to manipulation by tacit collusion among bidders, avoidance of head-to-head competition by the best capitalized and most successful bidders, and preemptive bidding strategies. This results in the wealthy bidders winning valuable rights to spectrum at significantly lower prices than other bidders. The bar graph above shows the number of auctions in which the difference in average number of licenses obtained by the top five bidders and the bottom five bidders is statistically significant:7 The Failure of FCC Spectrum Auctions 3 A Chance for Women and Minorities? Finally, while Congress specifically mandated that the FCC use spectrum auctions to increase economic opportunity for small businesses, women and minorities, there is no evidence that these auctions have significantly increased opportunity for any of these “designated entities.” An independent study funded by the FCC indicates that “minority and women applicants were less likely to win at least one license than were non-minority applicants [and] Minorities and women qualified for auctions at significantly lower rates than non-minorities.”8 Measured across all wireless auctions through 1999, minority and women applicants were less likely to win at least one license than were non-minority applicants. Indeed, studies commissioned by the FCC itself point to the failure of small businesses, women and minorities to qualify and to successfully participate in spectrum auctions. The fact that barriers continue to exist limiting the participation of women and minorities has not been resolved by the FCC. Indeed, as a problem in need of solution, this goal has simply been forgotten. Concerned that “sham buyers” were taking unfair advantage of the designated entity (DE) rules, the Commission changed its auction rules in April 2006 by “eliminating the payoff for this ‘flipping’ of licenses,” according to Commissioner Michael Copps.9 Still, the new rules do not prohibit DEs from having “material relationships” with larger corporations nor did they even address the problem of limited minority ownership or deployment of advanced services to minority communities.